Live-Blogging the AIG Hearing: Ed Liddy In the Dunk Tank

It’s better than the circus: A hearing on America’s most reviled corporate punching bag since Enron. A House subcommittee (yes, a subcommittee) on capital markets may be getting its most attention ever thanks to American International Group Inc.

Edward Liddy, chief executive officer of AIG, is in for a grilling. (Associated Press)

1:24 pm: Liddy enters and turns around to hear the concerns of the Code Pink crew. Behind Liddy is a pink “Fire Geithner” sign. Rep. Paul Kanjorski (the subcommittee chair) is not pleased, calling on the Capitol Police to restore order to the room. “I’m a very patient person, but don’t try my patience,” Kanjorski says, his voice rising. “Now, the pink ladies back there respond properly or please exit the room. Signs down!”

Well, that was a nice start.

1:26: Liddy raises his right hand to take the oath. (The House Financial Services Committee rarely swears in witnesses.)

1:27: Kanjorski defends Liddy a bit before the beating, noting that he responded to a government call to serve and doesn’t make any real money. Some threats on Liddy, too? “I’m sure that you and your family have had a great deal of abuse, particularly in these last few days,” Kanjorski says. “We do not intend to harass you here in this committee, nor should we.” But we do want answers, he says.

Kanjorski walks through the discussions he has had with Liddy over a couple of months about the bonus payments. He says he warned that not stopping them would jeopardize a second financial-rescue plan. He indicates he falls in the “sue us” camp in dealing with the bonus recipients. And he wants an explanation for why other options weren’t used.

Actually, Liddy is ditching much of the prepared testimony, going straight to the bonus issue. “I’m trying desperately to prevent an uncontrolled collapse” of the Financial Products unit, he says. Liddy announces that this morning he asked employees of AIG FP who received bonuses above $100,000 to give up have their payments. “Some have already stepped forward and offered to give up 100% of their payment,” he says.

1:40: Liddy goes straight to questions after just over six minutes of testimony.

1:41: Kanjorski recognizes the repayments, but still wants to know why the details hadn’t been provided earlier. Liddy basically calls it a business and legal judgment to prevent the FP unit from collapsing. “There’s risk that that would blow up,” he said. “If it were to blow up,” he adds, it would cause “irreparable damage.” In the big picture, Liddy suggests $165 million was a good trade-off to keep that from happening.

Liddy, upon questioning about who knew what and when, says “everything we do we do in partnership with the Federal Reserve,” which sits in at board meetings and compensation committee meetings. He says he’s been discussing the issue with the Fed for three months, and assumes the information went to Treasury via the Fed. “There was no intent to deceive or hide anything,” Liddy says.

1:47: Rep. Scott Garrett (R., N.J.) asks more about the timeline. Liddy said that talking last week to Tim Geithner, the Treasury secretary, Geithner indicated he learned about the bonus issue the prior week. That appears to conflict with the timeline put forth by the Obama administration, saying Geithner only learned last Tuesday (March 10).

1:52: Kanjorski is not pleased with the pink people. “I think you’ve tried my patience now. The pink ladies, the signs are either going to be removed from the room or you’re going to be removed from the room,” he says. He orders the officers to take the signs. The ladies stay.

1:53: Rep. Barney Frank gets his chance at the plate and tells Kanjorski: “Mr. Chairman, given your method of dealing with this, I assume it’s a good thing no one was wearing a T-shirt with their slogan.”

Not bad, Chairman Frank. Not bad.

1:55: Liddy says there were no performance bonuses paid recently at FP, just retention bonuses. Why did some people get bonuses and then leave? Liddy says those people were required to stay, wind down their business line appropriately and then leave.

1:58: Frank asks Liddy to send the names of AIGFP employees who received bonuses. Liddy gets to the question we were wondering: What would happen to these people if crazy Americans had their names? “Sir, I will if I will be absolutely assured that they will remain confidential,” he says.

Yes, he’s asking Congress not to leak something.

Frank asks again for the names, and says “I won’t accept them under confidentiality.” He says he threw away some confidential information, fearing he’d release it inadvertently. (Good thing the friendly chairman didn’t rise up the intelligence committee, eh?)

Liddy’s response: “I very much want to comply with your request. I hope it doesn’t take a subpoena. If it does, then we will obviously comply with the law.”

Then he reads some of the mail from America: “All of the executives and their families should be executed with piano wire around their necks.” There was another, too: “My greatest hope, if the government can’t do this properly, we the people will take it in our own hands and see that justice is done. I’m looking for all the CEO’s names, kids, where they live, etc.”

“You have a legitimate request,” Liddy says. “I want to protect the well being of our employees.”

Frank calls the threats “despicable” but says they’re offered without much specificity. Now he says that he’ll consult with law enforcement and if there’s a serious threat, he’ll reconsider. “If we give in to these kinds of threats, we would never get information made public about a lot of things.” Also, he says, all threats should be prosecuted. “At this point I am not persuaded.”

2:01: News alert! Rep. Spencer Bachus (R., Ala.) is the first lawmaker not to ask about bonuses.

Bachus asks about mark-to-market accounting. Liddy calls it “a good concept, run amok” since it presumes there’s a willing buyer and seller. When the market dries up, that hits their value and forces writedowns. A decent lesson for Congress in mark-to-market accounting.

Again! Congressman, we give you a gold star today. His next question is about the wind-down of credit-default swaps and other financial instruments. Liddy provides updated details.

They’re talking more numbers now: Bachus doesn’t like the $170 billion figure for the total bailout in the media (yes, that’s us). Liddy says it’s around $80 billion: $40 billion in Treasury money from TARP and $37.8 billion for a Federal Reserve loan.

He explains further that the Fed funded other vehicles (Maiden Lane II and Maiden Lane III) to deal with assets, and those are performing without credit losses. He also says there are other loans available, plus the other $30 billion from TARP.

That’s how we get to the figure of $170 billion committed from the government to AIG. Liddy is arguing that AIG can pay back the $78 billion that’s out now. “We can do that but we need some help from the markets to do that,” he said.

Not a single question about bonuses from Mr. Bachus. We know Alabamans care about bonuses. But he took a pass on showing a little outrage while the world is watching. We are somewhat stunned.

2:08: Rep. Gary Ackerman (D., N.Y.) steps up, apologizes for the threats on behalf of good Americans to Liddy.

Then he gets back to the bonus issue. Phew. He tells Liddy that the money should be paid back, and paid back now. (The precise form of repayment he’d like is unclear. A suitcase full of cash?)

Liddy says he asked the leadership group at AIGFP to return 100% of the bonuses and would like to see how they respond. “My fear is that the damage is done,” Liddy says. “We will get the bulk of that money back. They will return it, but they will return it with their resignations.”

2:14: Liddy explains the Fed’s role, how the Fed brought in Morgan Stanley and Ernst & Young. He calls the arrangement with the Fed “a partnership” and says “we do not do a single thing of strategic import” without them. “There was great angst over the payment of these bonuses, on all of our parts, including the Federal Reserve.”

He says by canceling the bonuses, the risk was “too great” all the progress would be lost.

2:18: There’s an aside by the temporary hearing chair, Rep. Ackerman, who asks if the names of AIGFP employees would be provided to the New York Attorney General.

Liddy, who is not a lawyer, says the names haven’t been provided to Mr. Cuomo. Ackerman figures out how this is going to work.

“I’m sorry to be so evasive,” Liddy says. “I just want to protect our employees.” He expresses fears that their names, addresses and photos would be released publicly. But he adds upon further questioning: “It would be our intent to comply with the subpoena.”

2:21: We are exerting our right here to skip speeches and grandstanding.

2:27: What did he know and when did he know it? Liddy says it was October or November when he learned of the retention plans. He says he then sought a complete analysis of ways to alter them.

2:33: Rep. Michael Capuano (D., Mass.) says “Diogenes found his one good man and you’re it.”

It’s the latest sign that Mr. Liddy is doing surprisingly well at this hearing. There’s little screaming (except at the pink ladies). The CEO gets some credit for offering clear responses, whatever the lawmakers think of the rationale for his decisions.

Liddy says he “absolutely” knew the reaction would be like this about bonuses, though “perhaps not as severe” as it has been. He again defends trying to keep AIGFP employees to wind down derivatives contracts. “Each of these contracts is a complicated contract unto itself,” he said. “They’re really all unique.” If the firm went into bankruptcy instead, “more than likely those people would’ve walked out the door tomorrow.” Getting into a cross-default on the contracts “undoes everything” the government has done.

Is Liddy going to fire anyone next month? No. Each of the workers has a book of business — there are about 22 to 24 books — and “their job is to wind that book of business down.” Some by April, some by December.

How long before AIG overall is profitable? Liddy says two to three years, but that’s very dependent on market conditions.

2:39: Would the AIGFP employees have gotten these bonuses if the firm had gone bankrupt?

“Probably not,” Liddy said. Some would “if they were determined by a bankruptcy judge to be important” to the firm. Otherwise they’d be voided.

Liddy explains again that not paying the bonuses at AIGFP could put the rest of the government money at risk.

2:43: Rep. Joe Baca (D., Calif.) gets back to the basics. What’s the definition of a bonus?

Liddy explains that a “bonus” in this case is a reward for winding down a book of business.

2:48: Is Liddy that charming? Rep. Jeb Hensarling is the latest to shower praise: “You are one of the good guys.” You’re doing it for the country, and we thank you for that, he said.

At the beginning of the hearing Liddy looked like he just got out of a funeral. (We’d be frightened by the death threats, too.) He doesn’t look great now, but he’s looking better as the hearing goes on. And he only asked for half the bonuses back! Imagine how it’d be if he had asked for all the money back from everyone.

2:54: Rep. Stephen Lynch (D., Mass.) is the angriest yet. He’s a contract attorney, he tells us (an angry one, the people of the Commonwealth’s Ninth district should know). And he’s pulling out the bonus contracts to go over specific language with Liddy. He wants to know why there was language written in about performance, even though these weren’t performance payments.

After the assault, Liddy objects to the claims. Mr. Lynch repeatedly said “you” in referring to the contract writers, and Liddy delicately noted that that the term was used generously. (Liddy took home quite a sum of money as Allstate’s CEO, of course, but we can give him at least a little credit for not destroying that company.)

“I would not have done these contracts this way, and this whole arrangement would have looked — if it existed — would have looked a whole lot different,” Liddy says. “So I really do — I take offense, sir.”

Oh, Lynch ain’t over: “Well, offense was intended, so you take it rightfully, sir, you know.”

After a long exchange, it becomes clear that Lynch doesn’t really care what Liddy has to say.

3:02: Rep. John Campbell (R., Calif.) is the latest to thank Liddy for his “thankless service.” He determines from Liddy that the eventual wind-down of AIGFP will end up resulting in a “couple billion dollars” in losses upon closing. But that’s contemplated in the loan arrangements. (Yes, we know the real cost is much larger than that over time when you count bailout money. But he was referring to the final loss when it’s shut down.)

3:13: Kanjorski calls a recess for eight — yes, eight — votes on the House floor. It’ll take an hour. Kanjorski says he has “made arrangements” for Mr Liddy. We trust the pink ladies won’t be there.

Finally, a lunch break. We trust the House is not voting just yet on getting the other half of that bonus money back.

4:49: “Mr. Liddy, we are in effect at war,” says Rep. David Scott (D., Ga.). “Our economy is almost in the tank.” (Almost?)

Now we get the metaphor of the day, for which we give half a gold star: AIG “is sort of like a stone in America’s shoe,” Mr. Scott says. “The American people are depending that we get this stone out of this shoe.”

Hey, give him a little credit. He has a point to make in the end: Deal with the bonus issue entirely. “Getting half of the money back is not the answer. The answer is getting all of the money back.” (Yes, folks, Liddy is no longer getting a pass for his offer to seek half the money back.)

“We’re coming at this money because the American people want us to,” Scott says. The congressman doesn’t want to take AIG to court but will do what it takes.

Liddy says that’s “one of many many requests that I’ve had” about different ways to recoup the funds. “I hear your request.” He says he expects the “bulk of the people” will return the money, with their resignations. “We may not like the outcome of that, sir, when the people are no longer there,” Liddy says. “I’m worried about the $1.6 trillion of exposure.” Winding down the business “just got harder by many, many multiples,” he said.

There are more questions about why the contracts were set up this way originally, pre-Liddy. All great questions, but we assure you the answers (whoever they come from) won’t make sense to members of Congress (who mostly make under $200,000) or the rest of America (making well under $100,000). The culture of Wall Street simple pay won’t make sense to commoners.

4:57: Liddy is asked whether he’s found criminal activity at AIG. The answer: “absolutely none.” He says the company is “nothing like an Enron or a WorldCom.” He tries again to keep Congress from tarring all 116,000 employees or even everyone at FP. The credit-default-swap business was a small group that brought the company to its knees. The derivatives business, which is being wound down, got the retention bonuses.

5:10: And we’re back to speeches. It’s Rep. Thaddeus McCotter (D., Mich.). America shares your outrage, Congressman. Everyone does. His points aren’t so new: It’s “insane” to pay people such retention bonuses when unemployment is so high. Of course it is.

(This is a great issue, even though you won’t get the answers in a hearing. A few of the top AIG FP people might find other jobs given their derivatives expertise, considering how many messes need to be cleaned up in corporate America. But how many? All the important ones, or just some of them? AIG and the Fed bet that too many would walk. Is it a gamble to let them go, considering the $1.6 trillion in derivatives? Discuss.)

Rep. McCotter wants full restitution, and says the bonuses must be recouped before AIG gets more TARP money. That could be an interesting Fed-Treasury-Congress fight.

5:25: Is it possible we’re actually breaking some news here? As we approach dinnertime? Perhaps. A gold star for Rep. Michele Bachmann (R., Minn.) for pulling it off, and another star (since they don’t cost us anything) for staying late.

The question drawing out the news: How long would it take to break down the FP business? she asks.

Liddy looks to Omaha for his answer: Warren Buffett had a similar business, a third of the size of AIGFP, that took him four years to wind down. “I think you’ll see tremendous progress winding it down” late this year and particularly by the end of first quarter 2010, Liddy says. Some of these contracts go out 50 years, requiring a delicate balance negotiating those contracts. As it gets smaller it represents much less risk, he says, in making the obvious point to Congress.

His best guess? (Bachmann says she won’t hold him to it. Yeah, right.) His answer: Four years before it’s entirely gone.

Liddy says the AIG name “is so thoroughly wounded and disgraced” that it’ll probably have to be changed. (That’s already underway for some companies, of course.)

5:33: Upon questioning, Liddy explains that winding down the credit-default-swap business cost AIG $50 billion. He calls the insurance businesses “rock solid” from a policyholder perspective but says the AIG name has been “tarnished” at those businesses.

Rep. Joe Donnelly (D., Ind.) helpfully conveys to Liddy that his goal should be to pay the government back its money. (What a great idea! Do they really think he’s hoarding this cash in his vault at AIG?)

“You and I are in violent agreement,” Liddy says.

We believe that is, amazingly, his first use of the word “violent” at this hearing.

And we convey Liddy’s words, just because we want to, as President Obama lashes out at his company’s actions: “We need a victory in this country. We need a confidence-building victory. It’s important that President Obama’s administration be successful.” There’s a but at the end of that: we need help from markets to pull this off. (There’s always a but, isn’t there?)

5:39: Liddy is called a “knight on the white horse, and that’s not a reference to the color of your hair.” (Liddy replies that it doesn’t feel that way all the time. A gold star for understatement!)

5:56: Those of you watching at home will sense some repetition in this hearing. Almost eight hours since the hearing started, that’s not surprising. So we skipped over a bit.

Oh boy. Liddy is being asked to look at a 10K. They’re actually walking through the pages. There’s an incomprehensible suggestion that AIG’s government money is being counted as profits on the books. “This is an equity statement,” Liddy helpfully replies.

This is too painful to watch, doing math at a live congressional hearing. We can’t share any more of this particular segment. We’re almost into the ninth hour. If you made it this far, we owe you as much as you owe us.

6:02: Rep. Gary Peters (D., Mich.), tells us that he just returned from a press conference where he discussed taxing the FP bonuses at 90%. He’s also the most junior committee member, he tells us. We suspect his bill won’t be the one getting to President Obama’s desk.

“How can the fate of the US economy be in the hands of just 100, 200 people?” he asks.

Liddy says it was closer to 20 or 25 running the credit-default-swap business.

He explains that risk-management executives at AIG weren’t allowed into FP. The junior Congressman is astounded, rightfully. How was that allowed to happen?

“You need to get people who ran FP, Mr. Cassano, and the people that ran AIG before my arrival, and ask them that question,” Liddy says. (Wouldn’t that be an interesting hearing? Joe Cassano being questioned by the United States Congress after the AIG bonus flap.)

6:07: We knew it had to come to this. “Ask not what your country can do for you, ask what you can do for your country,” says Rep. Mary Jo Kilroy (D., Ohio).

6:12: Rep. Bill Foster (D., Ill.) mentions that he met with Liddy yesterday in his office. We know Liddy couldn’t have met all 50 subcommittee members. But the fact that he met someone this junior probably explains why Liddy has done far better than any of us expected. (That fact came up in the hearing to have Liddy restate, under oath, that his reading of AIG’s lawyers’ opinion was that breaking the bonus contracts would result in double the payment amount as damages.)

6:18: Rep. William Lacy Clay (D., Mo.) does not serve on this particular subcommittee. He’s on another subcommittee, but we’re in Hour Nine of this hearing so now he gets his chance.

After some back and forth, Liddy tells him that he wants AIG to be the first TARP recipient to return taxpayer money. That may not happen, given that others are already trying to return it. But Liddy says American taxpayers stand a “better chance of getting paid by AIG than perhaps many of the companies that have received TARP dollars.” That’s a bold statement, but maybe not completely crazy given how many good insurance companies are housed in AIG.

Rep. Clay, citing a St. Louis Post-Dispatch blog, asks the question so many people have been wondering, even though it’s already been answered. Why would the people who ran the company into the ground get bonuses?

Liddy explains again that “these are not performance-based bonuses, these are retention bonuses.” It’s for people to stay and fix the company. And the worst unit of FP, credit default swaps, is no longer. The people getting the money are in another unit, with the $1.6 trillion in bets on derivatives.

“These are not the people that ran the company into the ground,” Liddy says. He acknowledges that “contracts can always be altered” if both parties agree to it, but the company made the decision to keep them to give the company a “fighting chance” of surviving.

“It’s a risk assessment. If we keep those people, we have a higher probability of running this book down and not having it cost the American taxpayers more. … It was secondarily a legal consideration and primarily a risk consideration.”

6:22: Yes, almost five hours after Liddy said it at the beginning of his testimony, he is asked the magic question: Have you asked any of them to pay back this money to the American people?

We know some lawmakers weren’t there the entire time. We know you’re busy. But read one story online, check out one scroll across the bottom of a cable TV screen, and you would’ve found the headline from the top of the hearing about Liddy asking much of the FP staff to return half their bonuses.

What did they say? Liddy, without an ounce of bitterness in his voice, reminds the lawmaker that he’s been in a hearing room all day. He promises an answer to lawmakers once he gives the employees “a chance to make a rational decision.”

Liddy also says (in response to a question) that yes, he can understand why the American people think the AIG FP workers were paid way too much in retention bonuses.

6:32: Rep. Marcy Kaptur (D., Ohio) — yet another visitor — cites today’s Journal story about hedge funds and wants to know which hedge funds could get U.S. government money.

Liddy, of course, doesn’t have the answers. As the story said, banks were on the other side of the AIG bets, and the banks made their deals with the hedge funds. Liddy tried to explain that the details would have to come from the counterparties. Once he made clear he didn’t have the answers, the awkward questioning stopped.

6:43: And we’re back to the congressman who forced the painful walk through AIG’s 10K. Now we’ll tell you who that was: Rep. Alan Grayson (D., Fla.). He stayed late to get a couple more minutes. He’s new. And clearly trying to keep the showboating going on until the end.

The good lawmaker recounts Liddy’s estimate that 20 to 25 people were involved in the nasty credit-default-swap business that took down AIG. “What are their names please?”

Yep, we’re going through this again.

“I don’t remember their names,” Liddy says.

“I want to know who they are. Names please.”

Yes, it’s going to be that way. “I’m asking for the names of the people who ran the credit-default-swap business,” Grayson says.

“We will cooperate with you,” Liddy says, probably knowing he sounds like a lawyer even though he is not one.

“I want to know the names you know right now,” the congressman demands. By this point there’s it’s clear this was for the cameras. We trust those same cameras caught his errors reading a 10K earlier.

“I just don’t know them,” Liddy says. But wait! He coughs up one of them: Joseph Cassano, someone we already know.

“There are great people running AIG FP now,” Liddy says.

After more wrangling (and we thought the 10K discussion was awkward) Liddy says, “I’m just not going to do that. … That could be a list of people — individuals that want to do damage to them could do that.”

Whatever you think about his decision, another half gold star to Liddy for worrying about the lives of people who created this mess that put him in this chair. If the AIG FP people are getting death threats now, imagine what the people who were really running the show would face.

“I’m just not going to sit here and give it to you until I understand what the implications are,” Liddy says, promising to consult with his general counsel.

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